Puerto Rico Compass ©

Q4 2014: Another Turbulent Year

A year in review of 2014 quarterly economic indices in PR

Without a doubt, 2014 was another turbulent year for the PR economy. Businesses and households sadly miss the stable growing years of the late 80s and 90s. This continued state of crisis impacts householders’ and business owners’ peace of mind. Many households have lost confidence in the PR recovery and consequently, they are migrating to the US. Some businesses also are leaving the island given the uncertainty caused by proposed legislation, such as the tax reform or other laws, such as the “patente nacional” that have been approved in light of the ongoing fiscal crisis in PR. Of course it is easier for a US based firm to leave PR than for a “criollo” firm. This migration has the effect of reducing the tax base, and reinforces the continuation of the fiscal crisis. Yes, 2014 was another turbulent year with more bad than good economic news. Find out what happened to the economy in 2014 and what 2015 may entail.

Puerto Rico Economic Pulse ©

December 2014: A Mixed Bag of Gifts from Santa

How lower oil prices cushion the impact of a new tax in PR

Weaker demand for oil and large increases in US oil production have pushed oil prices to their lowest since the 2008 financial crisis. Oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $60. As oil price continues to fall, consumers can expect more money in their pockets to pay for gasoline, electricity, and other goods. The Puerto Rican government proposed a new increase in the excise tax on crude oil and its products to provide liquidity to the Government Development Bank (GDB), which is the fiscal agent of the Commonwealth Government. These additional revenues would service $2.9 billion in bonds to be issued through the Infrastructure Finance Authority (AFI in Spanish). The tax hike is expected to increase gasoline prices but, short term, the impact will be lower due to falling gasoline prices. Energy costs, exempt from the new tax, are expected to drop to pre-2008 levels. Now PR needs to undertake significant reforms before prices begin to rise again. Find out whether cheap oil and a growing US economy will promote growth in PR.

Puerto Rico Economic Pulse ©

November 2014: Myths and Truths on PR’s Current Cycle

A close look at economic fundamentals

Puerto Rico’s Great Recession, as is the case with any complex phenomena, is not without its own myths. For example, the prevailing wisdom is that those with college degrees have driven the recent loss of population in PR or that US economic growth will somehow induce growth at home. Moreover, a careful look at the evidence shows that our traditional economic thinking is simply no longer applicable to the Island’s current economic reality. This issue of PR Economic Pulse aims to counter several of the myths regarding PR’s present cycle, many of which have even created media headlines. We also provide a fresh look into once firmly rooted economic orthodoxy and offer some insight as to the relevance of such rationale for our present troubles. Now, more than ever, an honest and careful examination of our economy’s current economic fundamentals is needed if we want to permanently reverse our current course.

Puerto Rico Economic Pulse ©

October 2014: Game Changers in Puerto Rico

Analysis of key strategies to resume economic activity

According to the Merriam Webster Dictionary, a game changer is a newly introduced element or factor that changes an existing situation or activity in a significant way. Over the past eight years, the Puerto Rico economy has been in a terrible slump. Fiscal priorities have taken precedence over economic policies and time is running out. We have eroded our tax base and maximized the limits of public debt of the Central Government as well as its public corporations. Our objective is to provide a concise but compelling look at some key elements that will change the course of the PR economy and lead us to the path of recovery and growth, if only there is the leadership to execute and implement tough choices. This issue focuses on drivers and strategies that we know can work yet nothing happens.

Puerto Rico Compass ©

Q3 2014: Puerto Rico, The Sum of its Parts

An analysis of 3rd Quarter 2014 economic indices in PR

Puerto Rico’s economic situation raises serious questions about the capacity of policymakers to get the situation under control. Third quarter indices reveal a mixed picture. The economy continues to be stagnant. Full recovery will depend not only on internal but also on external factors originating in the US and other global economies. There is increasing dissatisfaction with local economic policies, escalating electricity prices, and persistently high unemployment. These factors, together with safety concerns and pessimism about the economic future have motivated mass migration to the US. Government has focused principally on the island’s fiscal issues, including liquidity concerns regarding the Government Development Bank (GDB). However, a perfectly balanced budget will mean nothing amidst a devastated economy. This issue addresses the urgent v. important economic issues and tracks the 3Q of the PR economy.

Puerto Rico Economic Pulse ©

September 2014: Households Still Struggling to Recover

A comparative analysis of US and PR households

The “elephant in the room” is debt. The PR economy has a hard time escaping a 0.0% to negative real growth level. Meanwhile, the U.S. continues on sluggish 2.0% growth. Shortly put, the PR theme since 2000 has been: “low interest rates help service the public and private debt burden. Pretend to have a credible plan, but never address the structural problem and simply buy more time.” Are households in PR at the end of the line? Time has caught up. Sustained high unemployment, migration flight, and a tax system built on punishing production and rewarding consumption is not sustainable. Households and government are speeding towards the inflection point at which point debt becomes harder to service because pretend-and-extend policy making has created a depression in investment and growth. PR’s public debt is now at 103% of GNP vs 61% ten years ago. Many households in PR are at the point where cash generated by assets is insufficient to service the debt taken on to acquire the asset, particularly regarding mortgages.

Puerto Rico Economic Pulse ©

August 2014: Has PR’s Recession Changed Consumption?

Understanding consumption patterns during this recession

A serious particular effect of severe downturns is that declining consumer spending, itself a reaction to the economy’s contraction, also undermines the prospects for recovery. In worst cases, a prolonged and deep plunge in consumption reinforces production driven recessions entering in a negative spiral. This takes place in closed economies, such as the US, where a significant number of consumer goods are produced in the mainland. Consumption is, in other words, a fundamental determinant of business cycles. Consumption is also a measure of the set of socioeconomic conditions that underlie consumer behavior, such as job opportunities, migration, price fluctuations, access to credit, and financial stability. The level of uncertainty in the PR economy and society is currently high. There is nothing to indicate that the current crisis will change quickly. How does the PR consumer behave in times of recession? This issue analyzes the impact of the ongoing recession on household consumption, effects, and threats for the future.

Puerto Rico Economic Pulse ©

July 2014: The World’s New Energy Order

Can Puerto Rico take advantage of it?

Politics overseas coupled with new technologies and rising economic needs in Asia have been reshaping the fundamentals of world energy markets for some time already. Social and economic upheaval in the Middle East, including the possibility of lifting Iran’s long-standing sanctions, has created new vested interests. Long dormant, yet unresolved, issues in South East Asia have resurfaced as China’s economic and military assertiveness remains in place. On the other side of the globe, the US is edging ever closer to effective energy independence thanks, in small amount, to the development of induced hydraulic fracturing. All these shifts will lead to more competition in energy markets, which, in principle, augurs well for PR. However, that may not necessarily translate into improvements on the ground if conditions on the Island do not change. There is still time but the window of opportunity at home is closing by the hour. PREPA, the electric power authority, is currently the island’s biggest challenge and opportunity for change.

Puerto Rico Compass ©

Q2 2014: PR’s Demographic Crisis

Impact of population shrinkage on economic indices

Compared with other states in the US mainland, Puerto Rico ranks 38th in terms of GDP. This economy is facing yet another crisis, a demographic time bomb. In 2013 official statistics indicated that the population declined by a record 40,000 people—roughly the population of the Municipality of Vega Alta. PR’s population started falling in fiscal 2005 and is now ageing even faster. More than 17% of Puerto Ricans are already 65 or older. According to projections by the PR Planning Board, the number of PR residents will fall from 3.6m to about 3.3m by 2020. Besides an ageing population, the major cause for population shrinkage is migration. About 97% of PR emigrants go to the US. This demographic outlook presents great challenges for various economic sectors, such as, labor, real estate, retail, banking, pension retirement systems, tax revenues, and the whole economy. Find out how a declining population in Puerto Rico impacts the island’s key economic indicators.

Puerto Rico Economic Pulse ©

June 2014: On Why Millennials Matter

Generation Y plays a key role in the workforce

There is a generation gap in the workforce. Baby boomers, born between 1946 to mid 1960s, resent Generation Y or the Millennials, born since the early 1980s to late 1990s. And Generation X, those born between mid 1960s to early 1980s, is fed up being “stuck in the middle between older workers who refuse to retire and younger ones who are treated far better than they ever were.” Puerto Rico needs to manage these three age groups with such differing attitudes. There is a widespread consensus among educators, marketers, and policymakers that digital technologies have given rise to a new generation of students, consumers, and citizens who see the world in a different way. Growing up with the Internet transformed their approach to work. Puerto Rico’s difficult economic and fiscal situation needs to regain competitive advantage in what it can produce and sell. Innovation plays center stage in this transformation. Can Millennials help?